Sustainable Logistics

SUSTAINABLE

LOGISTICS

NAVIGATING CHANGE IN EUROPEAN LOGISTICS REAL ESTATE

INDUSTRIAL EVOLUTION

06 THE CARBON COST OF LOCATION INTRODUCTION

BUILDING BETTER

INVESTING IN SUSTAINABILITY

SUMMARY MANAGING SUSTAINABLY

INTRODUCTION

INTRODUCTION

EVOLUTION INDUSTRIAL 01

SUSTAINABLE LOGISTICS INTRODUCTION

SUSTAINABILITY IS INCREASINGLY TOUCHING EVERY PART OF THE REAL ESTATE ENVIRONMENT. AND YET THERE IS SO MUCH THAT IS STILL EMERGING AND EVOLVING, ESPECIALLY AS MORE AND MORE STAKEHOLDERS WAKE UP TO THE CHALLENGES (AND OPPORTUNITIES) THAT SUSTAINABILITY REPRESENTS TO REAL ESTATE.

And not all real estate is the same. So, focusing on logistics and industrial assets specifically, we have explored some of the key factors that are playing a part in the decisions and strategies that stakeholders – including occupiers developers asset managers and investors – are employing when addressing sustainability.

How does location make an impact to occupier emissions reduction strategies? What are developers doing to reduce environmental impact, enhance social impact and improve adaptability of logistics buildings? What sustainability improvements make the most impact when managing existing buildings? And how are investors valuing sustainability credentials of assets when pricing? Beyond certification, what do stakeholders need to understand to avoid assets being stranded, particularly as trading rules, market expectations and financing options become more focused on sustainability measures?

This report explores the key issues of sustainability related to logistics real estate. From occupier strategies to development trends to asset management and investment, we consider what is making a difference now and what to consider for the future.

Head of EMEA Logistics & Industrial tim.crighton@cushwake.com

Head of Sustainability & ESG, EMEA james.woodhead@cushwake.com

Head of EMEA Logistics & Industrial and Retail Research sally.bruer@cushwake.com

HOW OPTIMISING LOCATIONAL CHOICE CAN REDUCE ENVIRONMENTAL IMPACT

For occupiers, logistics buildings represent nodes in their overall supply chains. But how do users of these buildings ensure that their operations are minimising their environmental impact as a whole? What role does the building make relative to other parts of their operations? What makes the most difference overall when looking for strategies to reduce overall impact?

EVOLUTION INDUSTRIAL 02 THE CARBON COST OF LOCATION

SUPPLY CHAIN EFFICIENCIES

THE SUM OF INCREMENTAL GAINS

THE GUIDING PRINCIPLES OF SUPPLY CHAIN AND LOGISTICS PLANNING ARE OPTIMISING EFFICIENCIES AND MINIMISING COST TO SERVE, WHILST MAINTAINING SERVICE AND QUALITY.

This governs many elements of the choices that businesses make when it comes to their operations, including location, size, type and functions of all nodes of a supply chain.

However, cost is no longer simply measured in terms of financial cost. As environmental impact has moved up the corporate agenda, the cost of operations is now a balance between financial cost as well as environmental cost.

Often, when considering the environmental impact of logistics operations, the real estate industry tends to consider the ways in which buildings can be make a difference: from higher levels of energy efficiency and generating energy from sustainable sources on site to using less carbon intensive materials and incorporating more socially inclusive elements into design.

However, real estate accounts for a very small proportion of overall greenhouse gas (GHG) emissions for which the global freight transport industry is responsible: the WEF estimates that logistics buildings account for around 13% of total GHG emissions compared with 87% for transport elements, particularly road transport.

And when we consider overall GHG emissions, transport of all types accounts for around a quarter of all GHG emissions in the EU, of which freight transport is responsible for about 40%.

GAS EMISSIONS

In Europe, understanding the components of those GHG emission and how they are evolving helps to reveal how supply chain configuration can make a difference: whilst cars account for the majority of road transport GHG emissions, their overall emissions have fallen by 6% between 2019 and 2022. In contrast, emissions from light duty trucks and heavy duty trucks and buses actually grew by 1.3%.

Optimising how supply chains are configured as well as adopting new vehicle and fuel types and other technologies will help to reduce GHG emissions in the future. In May 2024, the EU set an ambitious target of 90% emissions reduction by 2040 for most new trucks and coaches.

So how can supply chain configuration help to better reduce not only financial cost but also carbon cost, particularly when the contribution to both by road transport is so high?

WHAT DOES IT MEAN TO SUPPLY CHAIN CONFIGURATION?

When we consider how impactful transport is to the overall environmental impact of logistics, the location of assets becomes critical. Analysis shows that on average, transport costs represent the highest component of financial cost within a logistics operation – as much as 50-70% of total cost – and a sizeable proportion of network planning analysis centres around minimising financial costs of operation through optimal locating of nodes and utilising costefficient modes of transport.

But, with more and more businesses prioritising sustainability targets such as Net Zero within meaningful time frames, this carbon cost is increasingly influencing decision making. As a result, the location of operations becomes even more crucial, arguably more important than the quality of the asset.

To show the impact of locational choice on both operational and carbon cost, we have modelled several different scenarios to show the impact of choosing appropriate locations for supply chain nodes and how distance to end destinations in particular can help to minimise both the cost and carbon cost of logistics operations.

INTERNATIONAL RETAILER EXAMPLE CASE STUDY

WHAT IMPACT DOES DISTRIBUTION CENTRE RELOCATION MAKE?

To demonstrate the power of the right location, we have modelled a scenario for an international retailer with a large store network that is replenished from central distribution centres strategically located across Europe. In the scenario modelled, we have replaced a warehouse in the Distribution Centre (DC) network across Europe and considered the impact of this new location to the overall cost and carbon to serve this supply chain.

In this scenario, the retailer’s existing Hamburg warehouse which serves a wide geography including Germany, Austria and parts of Central and Eastern Europe is replaced with a new warehouse in Western Czech Republic.

INBOUND BY SHIP TO PORT OF HAMBURG

INBOUND BY ROAD TO DC

DISTRIBUTION CENTRE

INBOUND BY RAIL TO DC STORES

In this scenario, we have modelled the impact on mileage from the following components:

INBOUND LOGISTICS IMPACT

We have assumed that goods are transported by ship into the Port of Hamburg where they are then transferred by road to the DC. When moving operations to Western Czech Republic, we assume that they are still transported into Hamburg and then moved by rail to the nearest railhead and transported from the railhead by truck to the new DC. This would increase the mileage for inbound logistics by 4.1 million km, of which 87% would be by road and 13% by less-impactful rail. The overall carbon emissions of the inbound logistics operations would increase by almost 20 times with the move to the Western Czech Republic DC, largely as a result of the trunking between the railhead and the DC.

OUTBOUND

LOGISTICS IMPACT

We have determined that over 900 stores in the retailer’s network – many of which were served by the Hamburg DC – will now be served by the new Western Czech Republic DC and assumed that transportation will be by diesel truck, the most widely used type of large goods vehicle. By moving replenishment of these stores to the Western Czech Republic DC, the retailer reduces its outbound logistics by almost 5 million miles, a mileage reduction of 20% and 20% reduction in emissions created by serving from the Hamburg DC.

TOTAL LOGISTICS IMPACT

Whilst the inbound logistics operations would see a huge increase in mileage and emissions, the significantly larger reduction in miles and emissions in the outbound logistics operations would result a total reduction in mileage of 9% and in emissions of 10%.

How could emissions be further reduced?

RAILHEAD TO DC TRUNKING BY ZERO EMISSIONS TRUCKS:

Replacing diesel or petrol trucks with zero-emissions electric trucks for the journeys between the railhead and the DC would reduce the emissions for inbound logistics significantly (only the rail journey would contribute to the emissions)

DISTRIBUTION TO NEAREST STORES BY ZERO EMISSIONS TRUCKS:

Similarly, by replacing diesel trucks with zero-emissions electric trucks for the stores within a reasonable distance (here we have modelled 160 km as a reasonable range for the vehicle type without requiring recharging before returning to the DC).

TOTAL IMPACT:

Vehicle and fuel changes for these two parts of transportation in this network could further reduce emissions, taking the overall reduction to 20% lower than the current position.

REDUCTION IN ANNUAL MILEAGE AND EMISSIONS

Source

Cushman & Wakefield

EXAMPLE CASE STUDY

CONSUMER GOODS MANUFACTURER

IS THE CURRENT LOCATION OPTIMAL?

When considering the opportunity to improve the carbon impact of a distribution centre operation, often the focus is on the ways in which the real estate asset can be improved, particularly when the building is older and less efficient.

However, when the location is optimal, the overall carbon cost of moving to a more efficient building but in a further away location from the other nodes in a business’ supply chain can be far higher than staying put, even if the original building is environmentally inefficient.

In this scenario, we have used a consumer goods manufacturer whose distribution warehouse is located close to its production facility.

This large DC is over 30 years old and is inefficient from both an operational and carbon perspective. We have modelled the different annual costs associated with relocating the DC to four alternative locations and assumed that the replacement building will be a newly-built, highly-efficient unit with high environmental credentials which would result in less energy usage and fewer staff being required to run the building.

CURRENT DISTRIBUTION CENTRE LOCATION

ALTERNATIVE DISTRIBUTION CENTRE LOCATION

In these alternative scenarios, we can see that the following happens:

UTILITY COSTS

Utility costs (using energy purchased from the national grid) will be lower in every move scenario because of energy efficiency gains in a newly-built, more environmentallysound asset. This cost could be even lower when other factors – such as solar PV powering of functions on site are implemented.

INBOUND TRANSPORT:

However, when we consider the inbound transportation by moving to a further-away location (assuming that transportation is by diesel truck), this has significant impact on overall cost and carbon. For the four modelled move locations, the distance travelled for inbound logistics increases by between six and ten times the distance currently travelled: with the existing DC being so closely located near the production facility, inbound logistics mileage currently accounts for only 3% of total operating cost whereas in the four move scenarios, it accounts for between 15-22%. Similarly, from a carbon emissions perspective, inbound logistics currently accounts for only 8% of total emissions whereas in the four move scenarios, it accounts for between 37-49%.

OUTBOUND TRANSPORT

For outbound logistics operations, the choice of these alternative move locations are less optimal than the current location but by smaller degrees than for inbound. The mileage for outbound distribution increases by 10-34% in the four different location scenarios. However, given that this mileage is substantially larger than the inbound mileage in every scenario, this means a significant increase in total distance – and cost and carbon – for each alternative location. Outbound transport costs and emissions increase by 10-34% for the four alternative locations.

Overall from both a financial and carbon cost perspective, despite the building being significantly less energy efficient, the optimised location of the current facility means that transportation costs and emissions are the lowest of the five scenarios.

The implication for this scenario is that remaining in the existing building is actually more environmentally optimal (and cost minimising).

But it also shows the scope for reducing emissions through potential improvements to the building that would make the asset and the location even more attractive from an environmental, cost and operational perspective.

Source Cushman & Wakefield

FUTURE CONSIDERATIONS

WHAT COULD MAKE A DIFFERENCE TO LOCATIONAL CHOICE, COST AND CARBON IN THE FUTURE?

FUEL TECHNOLOGIES

Evolving technologies , occupier business practices and other factors that may influence future choices include: The majority of impact in decarbonising freight transportation will be in switching to electric solutions or renewable fuels: Boston Consulting Group with the WEF estimates that as much as 80% of the reduction in emissions over the next 10-15 years will be from electric vehicles and alternative fuels. In the long term, the switch to electric and alternative fuels could mean that locations that are further away from inbound nodes and outbound destinations could become more viable.

VEHICLE TECHNOLOGIES

Efficiency improvements to vehicle designs and improved routing technologies are also expected to have an impact on emissions reduction, albeit far smaller than fuel technologies. Other considerations may be the development and adoption of autonomous freight vehicles which could translate to more efficient vehicle movements.

COOPERATION AND CONSOLIDATION

Inter-business visibility and data sharing can help to find efficiencies such as reducing ‘empty running’ (the return of empty vehicles to depots following a delivery) or using empty space in part-loaded trailers of another business. This requires cooperation between businesses which might otherwise have been unwilling to share information but this represents an opportunity to reduce overall vehicle movement and emissions.

MODAL SHIFT

Moving goods off road and onto more efficient modes of transport such as rail and inland waterways, could have significant impact on emissions. Not only are these forms of transport less carbon intensive but larger volumes can be moved in single trips. One of the factors that has limited wider adoption of alternatives to road in Europe is the infrastructure required: railways and canals need to reach the destinations where businesses want the freight to be (or at least get close to it) and appropriate facilities such as railheads and inland terminals need to be available for the loading and unloading of goods onto last mile vehicles. More investment in infrastructure is now happening as decarbonisation has become a priority for businesses and government.

DIGITISATION

As a tool in the ongoing challenge of continuous supply chain improvement, digitisation can help to transform supply chains from linear structures into ecosystems, better able to respond to challenges and pressures and increase efficiency through performance optimisation and predictive analytics. Sustainability improvements can be included in the goals of digital projects, allowing for improvements such as route optimisation and modal shift choice, alternative (ideally local) sourcing and scenario modelling of disruption responses using digital twins of existing supply chains. The developments in AI will also enhance forecast reliability and subsequently underpin efficiency gains within route scheduling and optimisation.

WHEN CONSIDERING THE ROLE OF REAL ESTATE IN REDUCING THE IMPACT OF SUPPLY CHAIN EMISSIONS, LOCATION IS CRITICAL.

The much larger impact of transportation – particularly road transport –compared with real estate means that choosing locations for optimisation of transport impact will often outweigh the impact of the real estate. However, improvements in both the transportation choices and buildings will all contribute to the wider environmental impact of logistics and supply chains.

BETTER

HOW DEVELOPMENT IS SHAPING SUSTAINABILITY OF LOGISTICS

BUILDINGS

Once building location has been optimised, the question then becomes what can be done to optimise the building itself? And what does it mean if the building is newly built or an existing building that needs to be improved?

EVOLUTION INDUSTRIAL 03 BUILDING

In this section we will focus on new development. When it comes to sustainability and real estate, the main elements on which design and construction is focused are:

ENVIRONMENTAL IMPACT

In the past, operating carbon was the primary area of focus, particularly when considering the ‘lettability’ of an asset and the positioning of how a building is less impactful (and often cheaper) to run for a tenant. Following that, embodied carbon became far more a consideration from a development perspective, moving further up the agenda with more stakeholders – not just developers but investors and occupiers too. Now, assessments are now focusing on whole life carbon impact , that is, the sum total of all asset-related GHG emissions and removals, both operational and embodied, over the life cycle of an asset, including its disposal.

SOCIAL IMPACT

logistics & industrial developers are now increasingly looking for ways to ensure that their buildings and schemes deliver social value as well as economic and environmental value. This takes the form of both more and better places for people within logistics and industrial buildings and parks but also better integration with and enhancing of local communities.

ADAPTABILITY

Additionally, buildings are also now being considered for their adaptability – no longer is it enough to think about what the building will be now and even over the medium to long term but how and what the building can be transformed into over the very long term.

ENVIRONMENTAL IMPACT

WHOLE LIFE CARBON IMPACT

So what should we be thinking about when it comes to carbon and sustainability in the development of logistics buildings?

The combined total of embodied and operational emissions over the whole life cycle of a building including material sourcing, manufacture, construction, use, demolition and disposal that is whole life carbon impact is now considered the best approach to considering new development.

Part of understanding the whole life carbon impact of a building is Life Cycle Assessments (LCA) of individual component throughout each phase of the building’s life, from production/ construction, use and end of life as well as any externalised impacts (such as waste management, recycling and transportation of materials).

The key is that the earlier in the lifecycle of a building that carbon is addressed, the more opportunities there are to reduce it.

Given that embodied carbon can account for up to 80% of an industrial building’s typical carbon footprint, the initial construction of assets represents a significant opportunity to reduce the impact that new buildings have on the environment.

When creating new buildings this means:

Design in the use of low carbon materials, using welldesigned delivery processes and minimising resource consumption

Build efficiently, using new construction technologies that minimise emissions and reduce or eliminate waste

Consider the operation and maintenance of the building and how to reduce the emissions

Consider the end of life of the building including demolition and associated waste management and transport as well as recycling and reuse of materials

THE DESIGN AND DEVELOPMENT PRACTICES FOR NEW BUILD LOGISTICS AND INDUSTRIAL DEVELOPMENTS HAVE EVOLVED SIGNIFICANTLY OVER THE PAST TWO DECADES.

Developers of logistics and industrial buildings have progressed development standards swiftly over the past 15-20 years: features that were only emerging in the late 2000s are now considered part of standard design.

And beyond what is considered standard, logistics and industrialt developers are often pushing into new territory with design and building materials to further minimise both operating and embodied carbon.

CONSTRUCTION & DESIGN SUSTAINABILITY INITIATIVE FOR LOGISTICS & INDUSTRIAL BUILDINGS BY DEVELOPERS

TRIPLE SKIN ROOFLIGHTS

RAINWATER HARVESTING

AIR TIGHTNESS

SUSTAINABLE DRAINAGE SYSTEMS

RECYCLED/RECYCLABLE FINISHES (EG CARPETS, CEILING TILES)

ENERGY METERING

AIR SOURCE HEAT PUMPS

ENERGY-EFFICIENT LIGHTING, HEATING AND SANITARY FITTINGS (EG LED LIGHTING, MOTION-ACTIVATED LIGHTING)

ELECTRIC PASSENGER VEHICLE CHARGING POINTS

TRANSLUCENT WALL LIGHTS

SOLAR PV PANELS (FITTED OR ROOF-READY)

OFF PEAK DIMMING CONTROLS FOR EXTERNAL LIGHTING

NEW BUILDING MATERIAL ADOPTION AND SUSTAINABLE SOURCING (EG RESPONSIBLY SOURCED TIMBER, CEMENT REPLACEMENTS IN CONCRETE, LOCALLY SOURCED PLANTING)

ELECTRIC GOODS VEHICLE CHARGING POINTS

GREEN ROOFS AND PVS ON CYCLE SHELTERS

STAFF EXTERNAL AMENITY / EXERCISE AREAS

ENVIRONMENT ANALYTICS/MONITORING SYSTEMS

ON-SITE ECOLOGICAL INITIATIVES (EG WILDFLOWERS, BEES AND INSECT HABITAT IMPROVEMENTS)

BATTERY STORAGE

SOURCING OF GREEN STEEL

RECYCLED RUBBER AND PLASTIC ROAD MATERIALS

GAS-FREE SYSTEMS (ELECTRIFICATION)

EMBODIED CARBON

EMERGING NEW BUILDING MATERIALS HAVE THE POTENTIAL TO BE DEPLOYED IN LOGISTICS AND INDUSTRIAL BUILDINGS IN WAYS THAT WILL REDUCE EMBODIED CARBON.

This can be particularly impactful in sustainability initiatives for this sector, especially given the often large quantities of carbon-intensive materials that are used to make these huge buildings. Developers are also now looking further than scope 1 and scope 2 emissions to scope 3 and beyond.

And the introduction of the EU’s European Carbon Border Adjustment Mechanism (CBAM) – which aims to “put a fair price on the carbon emitted during the production of carbon intensive goods that are entering the EU, and to encourage cleaner industrial production in nonEU countries” – will further mean that companies bringing products into the EU will be compelled to source products that are minimising their GHG emissions to avoid significant additional costs.

New building material innovations:

Steel typically makes up 30-35% of the construction materials used in distribution facilities. But steel production is a highly carbon-intensive industry: steel production accounts for 5% of carbon emissions in the EU and 7% globally. The steel industry is evolving its strategies around reducing its carbon emissions. Key to this is the movement away from coal-fired blast furnace/basic oxygen furnace routes of steel production to lower carbon-emitting routes of production such as electric-arc furnaces (ideally powered by sustainable electricity sources) and hydrogen-fuelled direct reduction of iron (DRI) routes (which limits emissions to water vapour rather than carbon). Currently, the amount of green steel being produced is relatively small – estimated at c.8% of total global steel production – but the appetite for green steel is growing and some steel producers are investing in green steel production plants across Europew. Indeed, major manufacturers including Thyssenkrupp, Tata Steel and ArcelorMittal Europe have committed to ambitious carbon-neutrality goals by 2045-2050.

LOW-CARBON CONCRETE

Concrete is the second most used material in the world behind only water and is the single largest component of distribution centre buildings, accounting for 35-45% of construction materials. The production of cement, the key ingredient in concrete production, creates huge carbon emissions; in total, the production of cement accounts for 7-8% of total global carbon emissions, making it one of the largest contributors to global emissions.

Changes to the traditional formula for making cement (and concrete) but still delivering the required performance levels are seen as a key way to reduce emissions; these changes include using different materials to make lower-carbon cement, using alternatives to cement (such as recycled glass), using different binders in concrete and creating new concrete formulations that could reduce the required volumes for the same performance.

CROSS-LAMINATED TIMBER

Cross-laminated timber (CLT) is growing in interest and use in warehouse construction. Technological advancements in the manufacture and use of CLT has meant it is now more versatile in its application and can be used more easily as an alternative to steel in particular, replacing steel beams, supports and frames. CLT has a far lower carbon footprint compared to steel and concrete, both in the materials and energy used to create the products. Whilst CLT will not be appropriate for all logistics and industrial developments, more consideration is being given to using it in new developments.

GREEN STEEL

Evolving building practices contributing to carbon reduction strategies:

CIRCULARITY OF CONSTRUCTION PROCESSES

Including using concrete and other hard materials created in demolition of existing buildings as aggregate in new construction projects including in the production of concrete.

WASTE REDUCTION AND IMPROVED RECYCLING

Of building materials on building sites.

LOCAL SOURCING

Of building materials for lower impact of transportation.

Evolving design features contributing to carbon reduction strategies.

COOL ROOFS

Cool roofs are roofing systems with solar reflective materials and ‘green roofs’ of plants, which are designed to absorb less heat from the sun, reduce urban heat island effects and reduce the need for cooling (hence improving the energy efficiency of buildings). This and other cool initiatives are also being considered when projecting the life of the asset forward in climates that are expected to have higher temperatures, especially for insurability and staff and product safety.

CLAD-RACKED SYSTEMS

This is where the cladding of a distribution warehouse is actually suspended from the racking system within the warehouse itself which can not only improve the efficiency of the operations, it can also reduce the volume of material required for the building and can also be more easily dismounted and the components more easily be recoverable.

How these strategies are adopted for logistics and industrial building construction will be led by both necessity (such as, where legislation or compels change or where product shortages mean alternatives need to be sought out) and demand (for example where occupiers ask for more of specific features to be more sustainable or efficient or as expectations from capital and investors for more sustainably built developments increases).

And developers themselves are at the forefront of how things are changing: many see this as not just the best way to progress and evolve development of logistics and industrial buildings but the only way to be responsible and sustainable creators of space.

OPERATING CARBON

USE AND OPERATION OF LOGISTICS AND INDUSTRIAL BUILDINGS ALSO ACCOUNT FOR A SIGNIFICANT COMPONENT OF THE CARBON EMISSIONS THAT BUILDINGS CREATE.

Developers are increasingly incorporating as standard measures that help to improve the energy efficiency of operating the building including:

LIGHTING TECHNOLOGIES

Developers have added rooflights at regular intervals to reduce the required powered lighting but are now also including wall lights. Developer are also fitting lower-emission LED lighting as standard for both internal and external lighting.

WATER TECHNOLOGIES

Features include rainwater harvesting for use in toilets and irrigation of landscaping, solar heating of hot water and water use reduction technologies such as low flush toilets, low water use taps and sensors.

HEATING AND COOLING TECHNOLOGIES

Many developers are now requiring new developments be fitted with all-electric air source heat pumps rather than gas boilers to reduce their carbon emissions. Warehouses have improved their airtightness (to reduce heat/cooling loss) albeit this has been relatively good for warehouses over time but continues to improve.

BUILDING MANAGEMENT SYSTEMS

Developers are now including integrated building management systems which through careful monitoring, ensure energy use and efficiency is optimised. In addition, developers and landlords are collecting information on tenants’ energy usage to help tenants’ drive efficiency and provide information on energy use in buildings to develop further solutions for both new and existing assets.

Components of space that are now being included as standard in new developments include:

STAFF WELFARE SPACES

Whilst not a new concept to provide canteens and refuge spaces and even gyms and leisure spaces in warehouses, landlords are now providing more staff welfare spaces, particularly within larger warehouses (for example, driver refuge areas are now typically provided in more than one location given the distance to travel for drivers at different ends of a very large building).

SOCIAL IMPACT

Increasingly developers are improving the type and quality of spaces for people in logistics and industrial buildings. Staff wellbeing, particularly in an ongoing environment of labour shortage, is an increasingly significant factor for occupiers for worker recruitment and retention and because employee wellbeing is linked to performance.

QUALITY OF FACILITIES

To retain staff, occupiers are increasingly expecting higher quality of spaces where their people work, for example, better heating, better lighting and higher quality fit-out of offices, bathrooms and kitchens.

EXTERNAL SPACE FOR STAFF

Many new facilities, both individual buildings and larger logistics parks, now include external amenity spaces, including outdoor dining areas, running tracks and exercise equipment, that staff can enjoy during break times.

MORE GREEN SPACES

Developers are also improving the look and feel of outdoor spaces for buildings and parks to create more attractive outdoor areas, particularly including more natural elements such as higher quality landscaping and green/living walls. Developers are also focusing on biodiversity and biodiversity net gains, especially for new developments.

ANCILLARY OFFERINGS

Developers and asset owners are also looking to include amenities - such as cafes and service providers - on parks to provide employees with more options without having to use their time going to off-site locations

Developers are also increasingly creating spaces that better integrate with the communities and environments within which they are located, including initiatives such as:

ACCESSIBILITY FOR COMMUNITIES

Logistics parks and industrial estates are usually largely inaccessible to all but the people working there. Developers are now often looking at ways to better connect these spaces with the people living in nearby communities, including establishing community accessible spaces like walking tracks and nature reserves on site.

TRANSPORT LINKS

Developers have long been required to create green travel plans including engaging with local public transport providers to establish routes and stops that allow workers to get to work more sustainably. Developers, particularly those creating large park environments, are now often including walking and cycle routes to connect their schemes as well as establishing park-wide car sharing schemes to reduce overall car traffic.

TRAINING AND LEARNING FACILITIES

This is an opportunity to integrate schemes into the fabric of local economies by establishing paths to careers in logistics and other services represented on the parks by helping people to gain skills and experience.

ENGAGEMENT WITH WIDER COMMUNITIES

Many major developers have established initiatives and funds to invest time, money and efforts in community initiatives such as supporting local schools and charities. And developers are now also compelling their partners – such as contractors – to also embed social value into their business operations when working on their schemes. This includes contractual commitments to create employment opportunities for a range of people and volunteering and engagement with local communities including through schools and charities.

ADAPTABILITY

MUCH OF THE EMERGING FOCUS IN DESIGN AND CONSTRUCTION IS HOW TO MAKE BUILDINGS MORE ADAPTABLE IN THE FUTURE: HOW CAN FUTURE USES OF THE BUILDING MINIMISE ANY ADDITIONAL EMBODIED CARBON BEYOND THAT USED IN THE CREATION OF THE ORIGINAL BUILDING?

Change is inevitable over a building’s lifetime and buildings that are more adaptable will remain relevant to occupants at lower cost, both financial and environmental, and relevant to owners by retaining value more effectively.

Again, adaptability of logistics and industrial buildings is arguably more achievable than other asset classes given the relatively straightforward nature of the structures but, even so, this adds another layer to development considerations when building a new asset.

FOR LOGISTICS AND INDUSTRIAL BUILDINGS, FUTURE ADAPTABILITY COULD INCLUDE:

REUSING

Existing frames and concrete slabs in situ rather than full demolition.

RECYCLING

Of components such as panels, racking.

MINIMISING

The demolition of concrete slabs through the strategic strengthening of specific points for secondary fittings to support greater weights (for example, for mezzanines, or automation).

ANTICIPATING

For new developments, anticipating future requirements and including features that will make adaptions more easily achieved in the future. For example, with the anticipated growing requirement for energy due to the increase in systems automation, adding additional ducting for new power connections at the initial construction phase will mean cabling can be more easily added to the building (without having to drill through slabs or built structures) at a later date.

WHAT ASSET MANAGEMENT OPPORTUNITIES ARE EFFECTIVE

When considering how to improve buildings’ sustainability credentials, we of course consider new build assets but the majority of buildings are existing assets. So how to improve these, especially as restrictions on trading less well credentialed assets are to be implemented and as older buildings become less attractive to occupiers? What are the options available, what impact do they have and what are the challenges with implementing these changes, from both a cost and a practicality perspective?

EVOLUTION INDUSTRIAL 04 MANAGING SUSTAINABLY

WHERE TO START

FOR ASSET MANAGERS, THE FIRST STEPS INVOLVE UNDERSTANDING THE FOLLOWING:

WHAT IS THE ASSET NOW IN TERMS OF ENERGY USE INTENSITY, CARBON EMISSIONS AND CERTIFICATIONS? WHAT COULD IT BE AND HOW COULD THAT BE ACHIEVED?

WHAT ARE THE RISKS OF NOT DOING ENOUGH OR NOT DOING ANYTHING?

WHAT

IS THE ASSET NOW IN TERMS OF ENERGY USE INTENSITY, CARBON EMISSIONS AND CERTIFICATIONS?

UNDERSTANDING WHAT THE ASSET IS NOW IS THE FIRST STEP. THIS INCLUDES UNDERSTANDING THE ENERGY USE, THE CARBON EMISSIONS AND THE FABRIC OF THE ASSET.

Energy performance certificates (EPCs) are a key element of understanding the base line of an asset. EPCs are national ratings schemes that report the energy efficiency of buildings, taking into consideration only the operation of the building and its systems, not the operations within it.

However, the effectiveness of EPCs is somewhat limited in that they do not consider actual operational energy use, but are modelled and theoretical.

Close monitoring of actual energy usage is a key element when determining into which improvements to invest: by knowing exactly what the challenge is, asset managers are better able to craft the appropriate response to improve performance through strategic capital expenditure on effective building improvements.

Understanding the current asset also means considering the existing fabric and how the asset may be still be appropriate for use or how it may be challenged. The asset’s embodied carbon also needs to be considered, especially when moving on to thinking about what the asset could be transformed into.

WHAT COULD THE ASSET BE AND HOW COULD THAT BE ACHIEVED?

The next step is to consider what the asset could be and how to achieve that. What are the appropriate improvements that will transform the asset into a more sustainable asset?

And what impact could each improvement have on the credentials of the asset?

Investments are geared towards either improving energy efficiency of the building or to creating ways for lower carbon energy consumption.

Examples of improvements that can be implemented in logistics and industrial buildings include:

Installation of PVs (and any accompanying roof improvements) to create renewable energy on site

Replacement of gas boilers with electric air source heat pumps

Replacement of less energy-efficient lighting with LED lighting with motion activated sensors

Insulation and airtightness improvements to ensure buildings are more energy efficient

WHAT ARE THE RISKS OF NOT DOING ENOUGH OR NOT DOING ANYTHING?

Finally when appraising the value of an improvement programme, asset managers also need to consider what the potential impact of doing nothing or not doing enough. This will become part of the wider appraisal of the value of the asset in a variety of ways including:

The attractiveness of the building to occupiers, including its efficiency from an operational and sustainability perspective and therefore the risk of void.

The risk of lower rental levels being achievable and therefore lower capital value and lower returns.

The inability to be able to trade assets as their sustainability credentials mean that they will become stranded in terms of occupier lettings and/or exit strategies.

The potential impact of holding a poorer quality asset in the portfolio, including the potential ‘drag’ on sustainability credentials such as GRESB ratings and on the appeal of funds to investors and capital partners.

WHAT MAKES A DIFFERENCE?

ONE OF THE BIGGEST ISSUES FOR ASSET MANAGERS IS DECIDING TO WHAT SPECIFIC IMPROVEMENTS THEY SHOULD ALLOCATE FUNDS TO IMPROVE THE ASSET PERFORMANCE?

Of course this will depend on individual assets and differences by geography but tools are being developed to help asset owners and managers to better understand the goals they need to target for asset improvements.

Some of the key tools now being employed are developed by the EU-funded research project Carbon Risk Real Estate Monitor (CRREM) which aims to support the real estate industry to address the risks associated with “premature obsolescence and potential depreciation due to changing market expectations and legal regulations” related to sustainability and “foster investments in energy efficiency”.

CRREM recognises that if real estate stakeholders do not address these risks “many assets will become ‘stranded’ properties that will not meet future energy efficiency standards and whose energy upgrade will not befinancially viable”.

CRREM has created benchmarks for individual asset types in different countries to consider factors such as carbon emissions and energy use intensity both now and over time to meet the global climate goals of ensuring that global temperatures do not rise beyond certain thresholds.

Therefore asset managers can understand where their assets currently sit and how far into the future their assets will remain relevant. Beyond these points, assets will be considered ‘stranded’, that is,will no longer meet future market expectations and therefore will be exposed to write-downs.

Therefore considering asset improvements that ensure that assets do not become stranded within a specific timeline is a useful way of appraising the value of sustainability-oriented asset management strategies.

In order to assess the effectiveness of different strategies, we have examined the potential impact of some of the improvement likely to be implemented in L&I assets.

We have created a portfolio of hypothetical buildings across Europe, each of 10,000 sqm and each built between 2003-2005 and have assumed typical energy performance of these assets in each market.

We have then applied improvements of those likely to be considered for logistics and industrial buildings and determined the overall reduction in carbon emissions. We have also estimated the improvement to energy use intensity and considered where in the CRREM pathway these assets will then sit.

Based on this hypothetical portfolio of buildings and investment in improvements that move every asset’s emissions to 0 kg of CO2 per sqm per year (so as to comply with CRREM pathway targets for a maximum increase in global temperature of 1.5 degrees Celsius to 2050), we found that:

An average investment of EUR 113 per sqm results in an average decrease of carbon of 23 kg of CO2 per sqm per year – meaning that every EUR 10 per sqm invested in sustainability improvements results in a reduction of annual emissions of 2.2kg of CO2 per sqm.

INVESTMENT IN SUSTAINABILITY IMPROVEMENTSINVESTMENT VERSUS CO2 REDUCTION

This average investment of EUR 113 per sqm also results in energy cost savings of EUR 15 per sqm per year –meaning that the payback period for investments is on average 7.5 years in energy cost savings

INVESTMENT IN SUSTAINABILITY IMPROVEMENTSINVESTMENT VERSUS ENERGY COSTS SAVINGS

INDIVIDUAL BUILDINGS AVERAGE

WHICH IMPROVEMENTS MAKE THE MOST IMPACT IN REDUCING CARBON EMISSIONS?

In the hypothetical portfolio we have generated, we have restricted the factors to limited range of warehouse appropriate improvements such as fitting solar PVs, replacing fluorescent lighting with LED lighting, investing in lighting controlled motion sensors, investing in all-electric air-source heat pumps and investing in energy management and energy control systems.

The most effective investment for CO2 reduction (measured by what proportion of total CO2 emissions reduction is achieved by each feature) are PV installations (by using less energy from non-renewable sources higher carbon emissions), albeit there is a wide variation in the overall impact.

PV installation is a measure designed to improve the carbon footprint of the energy use of the building through improving the ‘quality’ of the energy being used (from fossil-fuel generated sources to renewable sources), rather than improving the building itself

In many cases, the amount of energy generated is in excess of the electricity required to run the building, opening up opportunities for exporting the energy created to alternative users/locations and to secondary revenue opportunities.

Improvements specifically designed to improve the energy efficiency of the building itself are those that that mean the building will require less energy to run. For example, replacing fluorescent lighting with more energy-efficient LED lighting and replacing gas boilers with all-electric air-source heat pumps (which extract heat from the ambient air outside to heat indoor spaces and/or power hot water systems) are replacement features which improve energy efficiency. Additional elements – such as improving airtightness, wall and ceiling insulation and window replacement – are improvements to the fabric of the building which will reduce the amount of energy required to operate it.

The impact on carbon emissions and the likely payback period to recover improvement investments through energy cost savings are one way of measuring the impact of the capital expenditure. Considering how assets remain relevant to occupiers, investors and markets – and how they might become stranded in the future – is also an important consideration when weighing up what investment in assets needs to be made now.

MORE THAN OPERATING CARBON ALONE

MUCH OF ASSET TRANSFORMATION FOCUSES ON HOW BUILDINGS CAN BE MORE EFFICIENT TO RUN – THAT IS, THE IMPACT ON OPERATING CARBON – BUT WHEN CONSIDERING WHAT RETROFITING IS APPROPRIATE, ASSETS’ EMBODIED CARBON INCREASINGLY NEEDS TO BE PART OF THE EQUATION.

Retrofits and refurbishments of assets will in themselves create embodied carbon. So it is important to consider firstly how that embodied carbon can be kept to a minimum. Prioritising the re-use and recycling of existing structures, components and materials should be the first consideration and then, when using new materials, choosing using low carbon materials, ideally sourced locally. As mentioned earlier, where buildings can be more flexible or adaptable to a range of different needs will further minimise future structural changes, reducing the carbon impact of retrofits and refurbishments.

Next, it is important to quantify the carbon savings made as a result of retrofit in more than just financial terms.

The examples shown above quantify the improvements to assets in terms of the financial cost of the improvement against the savings in energy costs; this determines the payback period to reach the financial breakeven point of the investment. The same measure can be calculated in terms of carbon: by calculating the embodied carbon cost of the refurbishment and establishing how the operating carbon emissions will be reduced over the following years as a result, the ‘ecological breakeven point’, and therefore the carbon payback period, can be established. This can then form part of the evaluation of the effectiveness of an asset retrofit programme.

CUMULATIVE GHG EMISSIONS, ENERGY COSTS, AND BREAKEVEN POINTS OF RETROFIT MEASURES INCLUDING EMBODIED CARBON AND RETROFIT COSTS

CUMULATIVE GHG EMISSIONS

EMBODIED CARBON OF RETROFIT

ECOLOGICAL BREAKEVEN POINT

CUMULATIVE COSTS

ECONOMIC BREAKEVEN POINT

RETROFIT COSTS

2019 YEAR OF RETROFIT

GHG CUMULATIVE EMISSIONS EMISSIONS WITHOUT RETROFIT

ENERGY COSTS CUMULATIVE ENERGY COSTS WITHOUT RETROFIT

Source: CRREM, EPRA, UNEP FI and Hines Embodied Carbon of Retrofits

WHAT OCCUPIERS WANT?

WHILST ASSET MANAGERS CAN IMPLEMENT A VARIETY OF IMPROVEMENTS TO ASSETS, IT IS CRUCIAL TO UNDERSTAND THE RETURN THAT THESE COMPONENTS DELIVER NOT JUST IN TERMS OF CARBON EMISSIONS REDUCTIONS BUT IN TERMS OF VALUE AND INCOME.

A key part of this is to consider what occupiers actually want. Buildings need to be operationally sustainable as well as environmentally and socially sustainable and occupiers have strong ideas about what can make a difference to their buildings’ performance.

In recent surveys of occupiers of logistics and industrial buildings across Europe, we found that 37% of respondents said that fitting solar PVs

to buildings would make a difference to improving their sustainability.

And 9% said that they would like to see solar energy battery storage added to the buildings or estates where they occupy buildings. In addition to environmental impact, occupiers are also focusing on how to improve social impact: 13% of respondents said that improvements to outdoor spaces, including spaces for staff, would be valuable.

WHAT IMPROVEMENTS (IF ANY) DO YOU THINK COULD BE MADE TO THE PROPERTY OR ESTATE TO IMPROVE ITS SUSTAINABILITY?

AND IT IS ALSO IMPORTANT TO CONSIDER THAT THE IMPACT ON SUSTAINABILITY

IMPROVEMENTS HAS TO POTENTIAL TO BE EVEN MORE EFFECTIVE IF TENANTS AND LANDLORDS WORK TOGETHER.

In recent surveys of logistics and industrial occupiers, an overwhelming majority of 66% of tenants said that they would be willing to work with landlords to improve the sustainability of assets, a clear opportunity for landlords and tenants to find more and potentially better solutions together.

One way in which landlord and tenant collaboration is manifesting is in the use of ‘green leases’ and ‘green clauses’ within leases, by enshrining obligations to work together to manage and improve the performance of a property within the legal structure of the lease.

FEATURE BOX: THE CASE FOR SOLAR PVS

ONE OF THE KEY WAYS IN WHICH EXISTING LOGISTICS ASSETS ARE SEEN TO BE ABLE TO IMPROVE THEIR SUSTAINABILITY CREDENTIALS IS THE INSTALLATION OF PHOTOVOLTAIC (PV) CELLS ON THEIR LARGE, FLAT ROOFS.

By creating low-carbon, sustainable energy, PVs can help to reduce the need for power derived from non-sustainable sources and improve the impact that operations within industrial buildings have on the environment.

Targets for transformation of energy generation to renewable sources are driving the growth in solar PV adoption. The EU has set ambitious targets for moving to renewable energy sources for the future.

The revised Renewable Energy Directive, signed in November 2023, set a binding target for 2030 of a minimum of 42.5% of energy consumption to be from renewable sources, up from the previous 32% target, with the aspiration to reach 45%.

This means almost doubling the existing share of renewable energy in the EU, of which solar will play an important part. Although these targets are directed at major utility companies, smaller schemes including those mounted on logistics and industrial assets will play a part. Each EU member state has been required to draft National Energy and Climate Plans (NECP) and provide progress updates on how they are achieving their 2030 solar targets as set out in their NECPs.

Under a 2019 amendment to the Climate Change Act, the UK has set the ambitious target of being net zero – that is, committing to a 100% reduction in greenhouse gas emissions by 2050 as compared to a baseline of 1990. Renewable energy generation is an important part of this, with the UK Government setting energy providers a target for all electricity to come from 100% zerocarbon generation by 2035.

The newly elected Labour government has put energy –especially green energy generation – at the centre of its election messaging and early signals are that solar and wind will form important parts of their plans; when in opposition, the Labour Party has announced a target of 50 GW of solar capacity for 2030.

WHAT IS THE OPPORTUNITY

LOGISTICS AND INDUSTRIAL BUILDINGS ARE SEEN AS AN ATTRACTIVE PLACE TO LOCATE PVS BECAUSE THE BUILDINGS ROOFS ARE LARGE, FLAT AND TYPICALLY UNIMPEDED BY DESIGN CHARACTERISTICS (WITH THE EXCEPTION OF ROOF LIGHTS).

It also can help to reduce the land use requirement for large solar PV arrays by utilising land on which structures are already located rather than using agricultural or other unbuilt land for ground-mounted schemes. The energy generated can then be utilised by the occupier in the building beneath them or can be channelled to an alternative destination such as battery storage for later use or to the grid for use elsewhere by other users.

The immediate advantage is that the energy draw for a building or an operation can call on the sustainably-generated energy created from onsite PVs whilst can bolster or replace any draw from the grid.

This can not only reduce energy reliance on less-sustainable sources but can also reduce costs. There is of course variability by country in this, given the different energy mix and difference in cost in different countries.

PV installation is now even more attractive as costs have fallen considerably. Installation costs have fallen over 80% since 2010, driven largely by significant reduction in the cost of PV modules themselves but also in other components such as inverters and racking and mounting systems as well as installation labour costs. Across Europe, the fall in installation costs have fallen by 76% to 86%.

Similarly, the cost of the electricity provided for use is also falling: the levelised cost of electricity (average net present cost of electricity generation for a generator over its lifetime) has fallen significantly since 2010, partly down to the falling costs in installation but also due to rising capacity factors. This means that the levelised cost of electricity from solar PVs is now lower than the fossil fuel equivalent.

PV installation can also have further value benefits including upgrades to sustainability ratings (such as in the UK where having PVs can also improve the EPC rating) as well as potential social value that could be delivered (for example, by providing excess solar-generated electricity to serve community needs such as local housing associations or shared district services).

WHAT ARE THE CHALLENGES TO RETROFITTING PVS

TO EXISTING BUILDINGS?

1

CAPABILITY OF THE BUILDING STRUCTURE AND THE ROOF TO SUPPORT PVS

MANY OLDER BUILDINGS REQUIRE WORKS TO THEIR ROOFS TO ENABLE PVS TO BE FITTED WHICH ADDS COST AND COMPLEXITY TO PV-FITTING INSTALLATION.

PVs often have a lifespan of 25 years and the roof below will also need to have a lifetime that matches this period. Older roofs and structural frames are less capable of supporting the weight of retrofitted PVs – not just the PVs themselves but wind and snow factors as well. Therefore replacing the roof may be necessary and it is often sensible to also add additional insulation to the roof (to further improve the sustainability credentials of the asset through energy efficiency gains).

With this additional spending, the payback period (the length of time taken for the cost of the installation to be realised through cost savings to the operation of the building) will be lengthened.

2

CONFIGURATION OF PVS ON EXISTING ROOFS

MANY LOGISTICS AND INDUSTRIAL BUILDINGS INCLUDE ROOFLIGHTS TO UTILISE NATURAL LIGHT WHICH THEMSELVES ADD VALUE TO THE ENERGY EFFICIENCY OF BUILDINGS.

However, recommendations in planning guidance is that PVs need to be a minimum of 1 meter away from rooflights and from roof edges.

If the existing roof has significant rooflights, works to replace some of these with solid roof panels may need to be included in roof works plans and costs or alternatively the number of PVs that can be fitted may be reduced.

4

BUILDING POWER CAPACITY INFRASTRUCTURE

DISTRIBUTION WAREHOUSES ARE TYPICALLY LARGE BUILDINGS THAT HAVE BEEN BUILT WITH A RELATIVELY LIMITED POWER SUPPLY FOR THEIR SIZE.

As a result, the building electrical infrastructure (for example, cables and junction boxes) through which power is channelled (typically from national power grids) is limited to the power capacity for which the building was originally specified – like a 3 amp fuse will blow if too much power is channelled through it. Therefore, when installing PVs on the roof of a logistics building, the amount of energy that the building can actually use is limited to the capacity of the building’s energy infrastructure. If there is a higher energy requirement which PVs can supplement or replace energy drawn from the grid, the building’s infrastructure will need to be upgraded as well which will require capital expenditure.

An alternative is if the energy generated from the PVs is not used within the building itself but instead is used in a “closed loop” such as diverted to be used for EV charging or for other discrete uses that do not require the building energy infrastructure to be amended. Alternatively the energy may be channelled to power storage for use at a later time (either by the tenant or another user if the battery storage is a collective resource on a park) or directed back to the national grid should it be an available option.

MATCHING DEMAND AND SUPPLY PATTERNS

A KEY CONSIDERATION IS HOW TO BEST USE THE ENERGY GENERATED BY SOLAR PVS. CAN THE OCCUPIER OF THE BUILDING USE ALL OR SOME OF THE ENERGY CREATED?

Not all users have the requirement to use the quantum of electricity that can be potentially generated by the PVs or at least not on a consistent basis (for example, manufacturing processes typically require high levels of energy but on a sporadic basis when machinery is utilised but otherwise can be have quite low energy requirements). An important part of understanding the tenant’s energy requirement is to collect data about their actual current usage to identify and provide plan for improvement works including PV installation.

What happens if the occupier of the building can’t use or doesn’t want to use the PVgenerated energy?

Can the energy be transferred to battery storage for use by others in a closed environment like a logistics park or industrial estate? This will require further investment in battery capacity but could also benefit a wider user base and could also prove attractive to a range of current and potential occupiers as well as creating a boost to sustainability credentials for wider number of assets and to funds overall.

Or can the energy be transmitted into the national grid for income? This will depend on the availability of infrastructure and/or the complexity of the connection approval process for this to happen which can vary quite considerably across Europe.

GEOGRAPHICAL FACTORS

WHERE THE BUILDING IS LOCATED MAKES A DIFFERENCE IN SEVERAL DIFFERENT WAYS WHEN CONSIDERING THE POTENTIAL OPPORTUNITY OF PV INSTALLATION.

One factor is the quantum of energy that can be generated. The number of daylight hours and levels of solar irradiance that a location enjoys can impact the energy creation capacity, as can the intensity of the sunlight (solar irradiance) at different times of the day or year. PVs are typically less effective when they reach temperatures over 25 degrees Celsius. The maximum power (‘nameplate’) capacity of PVs is often determined at this optimal solar cell temperature of 25 degrees Celsius: when the cell temperature exceeds 25 degrees, the PV module’s output power decreases, typically by c.0.5% for every degree over 25 degrees.

Another factor is the regulatory environment of different countries.

Countries across Europe are taking different approaches to driving new installation of solar PVs in both residential and commercial settings as well as utility-scale solar farms. Incentives, tax breaks and other government support programmes differ significantly from country to country as do planning and permitting conditions for new solar installations on commercial and industrial buildings. These differences will be factor in determining both the viability and cost of installing rooftop PVs.

Another consideration is the potential revenue that could be derived from excess energy generation that could be sold into national grid networks.

This could prove attractive as a source of income, albeit depends on the ways in which different countries’ systems are structured. For example, the feed-in tariffs in different countries vary markedly –typically determined by electricity authorities or providers who buy the energy from solar PV owners - and some providers (for example in the Netherlands) are now introducing return costs for feeding PV generated energy into national grids. Feed-in tariffs vary from country to country and also by the size of the PV system (measured in capacity by kW); feed-in tariffs for larger schemes typically range from EUR 0.05 per kWh to EUR 0.15 per kWh.

LEGAL AND FINANCIAL AGREEMENTS

OWNERSHIP AND MANAGEMENT POWER PURCHASE AGREEMENTS AND PRICING

Another factor is to consider who owns and operates the PVs and whose responsibility it is to maintain them and the roof: the landlord, the occupier or a third party operator?

In many circumstances, the landlord owns the PVs (as well as the roof) and it is their responsibility to maintain them. Alternatively, a third party may be contracted to install, maintain the PVs and own them and the landlord will grant a lease for the roof space (or the tenant may grant a sublease) to the operator. In rare circumstances, the occupier will own the PVs.

In each circumstance, crucial to any arrangement is that any operation or maintenance of the PVs does not interrupt or disrupt the operations of the tenant below. Any agreement for the roof and the PV operation will need to include provisions for business interruption which may be suffered by the tenant should anything happen as a result of the PVs being fitted or may be enshrined in the actual lease for the building.

A common way for the provider and user of the energy generated by PVs to contract is through power purchase agreements (PPAs). These are direct contracts between the user and provider in which pricing –either fixed pricing or a pricing formula – and length of agreement (typically 1020 years and usually coinciding with the break and termination dates of leases) are established. Pricing is usually agreed at a discount to current market price for electricity sourced from the grid, providing the tenant with an attractive discount on costs and the landlord and/or third party provider with an additional income independent to the rent on the real estate.

05

INVESTING IN SUSTAINABILITY

HOW LOGISTICS AND INDUSTRIAL CAPITAL MARKETS ARE BEING SHAPED BY SUSTAINABILITY FACTORS

Finally, when considering sustainability in logistics and industrial buildings we need to consider the impact on investment and financial performance. What do investors currently value when it comes to sustainability? Are they prepared to pay a premium to acquire ‘green’ assets? How are trading rules evolving regarding sustainability? What do investors need to think about beyond certification? How does sustainability impact performance? And how does it impact access to financing?

WHAT DO INVESTORS VALUE WHEN ACQUIRING ASSETS?

SUSTAINABILITY CERTIFICATION HAS BECOME A FAR GREATER CONSIDERATION WHEN INVESTORS ARE CONSIDERING THE VALUE OF ASSETS.

For many, the sustainability credentials of an asset being considered are at the top of the list of key pre-acquisition assessment criteria.

Investors’ focus on the sustainability certification is based on the implication that these assets will:

BE MORE LIKELY TO SECURE TENANTS NOW AND IN THE FUTURE, WHICH WILL MINIMISE VOID PERIODS

BE MORE LIKELY TO COMMAND HIGHER RENTAL LEVELS

BE MORE LIKELY TO RETAIN VALUE

MANY DEVELOPERS AND INVESTORS IN NEW DEVELOPMENTS ARE INCLUDING EXPECTED CERTIFICATIONS TARGETS INTO THEIR PLANS AND OFTEN THESE INVOLVE MULTIPLE CERTIFICATIONS –NOTABLY BREEAM AND/OR LEED AS WELL AS LOCAL EPCS.

Understandably, given the number and variety of assessment and certification systems, there are challenges for investors when weighing up how to place value on certifications. A recent survey by engineering and architecture consultancy Ramboll found that across a wide range of potential assessment systems, BREEAM, LEED and local EPCs as well as building life cycle assessments and cost analyses are the most widely recognised and used across the real estate industry.

AWARENESS AND USE OF THIRD-PARTY ENVIRONMENTAL / SUSTAINABILITY CERTIFICATION SCHEMES AND TOOLS

WHAT CERTIFICATIONS DO INVESTORS CONSIDER WHEN INVESTING?

Whilst there are many potential systems of certification for real estate assets, logistics and industrial property investors to date have tended to consider the following the most appropriate:

BREEAM

BREEAM (Building Research Establishment Environmental Assessment Method) is a globally-used assessment method for specifying and measuring the sustainability performance of buildings. BREEAM is used to assess whole life performance of real estate assets from new build projects to refurbishments and fit-outs.

BREEAM is the predominant method of assessment in Europe and is the most BREEAM rated assets are in the UK, France and the Netherlands.

Ratings from highest to lowest are Outstanding (score above 85), Excellent (70), Very Good (55), Good (40), Pass (25) and Acceptable (10). A development or refurbishment project will be awarded a non-expiring BREEAM rating upon completion whilst assets-in-use assessments are valid for three years. Many logistics and industrial developers now set high targets for BREEAM ratings as part of their project delivery with many targeting Excellent or Outstanding, particularly for larger scale developments.

LEED

LEED (Leadership in Energy and Environmental Design) is also used globally to rate buildings by sustainability credentials particularly decarbonisation, quality of life, and ecological stewardship.

Ratings from highest to lowest are Platinum (80+ points earned), Gold (60-79), Silver (50-59) and Certified (40-49). Established in the US, LEED is now increasingly being included in targets for European assets albeit there tend to be fewer including this measure in Europe than BREEAM.

WELL

The WELL Building Standard is a performance-based system for measuring, certifying, and monitoring features of the built environment that impact human health and well-being, through air, water, nourishment, light, fitness, comfort and mind.

Given that the majority of space in a L&I building Is not occupied by people, WELL has not been used as widely in the L&I sector but use of WELL is growing in interest as more developers and asset owners focus on incorporating health and well-being into building design.

ENERGY PERFORMANCE CERTIFICATES (EPCS)

As part of the EU’s objective of reducing GHG emissions by at least 60% in the building sector by 2030 compared to 2015, and achieving a decarbonised, zero-emission building stock by 2050, the Energy Performance of Buildings Directive was first approved in 2010 and has undergone several revisions. Under the Directive, every EU member state is required to have established a national EPC system with qualified experts assessing buildings according to their energy performance. Each of the current EU and the UK, then a member of the EU, has enshrined the EPC system in legislation and they have become part of the legal framework for trading assets.

HOW IS CERTIFICATION IMPACTING PRICING?

SO HOW ARE INVESTORS PRICING FOR WELL-CREDENTIALED ASSETS?

Certification of assets is an understandable way for investors to appreciate the value of an asset over and above the other characteristics such as location, lease terms and tenant covenant risk. As a result, investors are typically placing a premium on higher-credentialled assets.

Many investors use BREEAM ratings as a clear way of understanding quality across different asset classes and across different geographies: although there are differences in the way in which different BREEAM systems assess assets, they are broadly similar and they also report the ratings in the same terminology.

To understand how investors are putting a premium on well-rated assets, we ran analysis of the pricing differential for higher sustainability-rated assets that investors have paid over the past five years (which is broadly the period of time that a difference in pricing has emerged in real estate investment), dividing assets into two categories: High Rating (that is, assets that have BREEAM ratings of Very Good, Excellent and Outstanding) and Low/No Rating (that is, all other assets).

Given the relatively small number of assets that have been traded with BREEAM ratings across Europe as a whole, we have limited this analysis to L&I assets of 10,000 sqm or more in the UK and the Netherlands where there is the most data. Using this criteria, we have created a sample of over 1,500 transactions since 2019 relating to more than 1,800 properties, of which 18% sit within the High Rating category.

Our analysis showed that:

On average, there is a pricing premium of 19% for High Rating assets compared with Low/No Rating assets

ACQUISITION CAPITAL VALUE DIFFERENTIAL BETWEEN HIGH RATING AND LOW/NO RATING LOGISTICS ASSETS

Our analysis shows that the premium has evolved over time as market conditions have changed:

• With investors only truly starting to price for higher ratings in 2019, the premium was still relatively modest at 7%

• In 2020, however, the premium grew to 31% as the market starting pricing for sustainability credentials more keenly and as prices grew significantly on the back of increasing market appetite for logistics and industrial assets generally

• In 2021, as market activity in logistics and industrial investment reached unprecedented levels, the pricing premium narrowed to 12% as acquisition prices for assets of all complexions grew

• In 2022 and 2023, however, the market tone shifted, the premium has moved out to 22-24% as investors priced sustainability credentials more keenly in their ‘flight to quality’

When excluding superprime locations where values are higher but where the premium is smaller, we see an even greater premium being applied to High Rating assets. On average the pricing premium moves up to 24% for assets outside superprime areas compared with an average of 19% for all assets (including superprime). This implies that investors are placing even higher value on green credentials in locations where the quality of the asset will have a greater impact on its ability to attract and retain tenants, income and value.

ACQUISITION CAPITAL VALUE PREMIUM BETWEEN HIGH RATING AND LOW/NO RATING LOGISTICS ASSETS, AVERAGE FOR ALL LOCATIONS AND FOR NON SUPERPRIME LOCATIONS

We expect that this premium will persist as the pressure grows to ensure assets remain tradable (on both letting and investment bases) with trading rules becoming more focused on sustainability.

WHAT ARE THE RULES FOR TRADING ASSETS? AND HOW IS IT EVOLVING?

SO HOW DOES SUSTAINABILITY AFFECT INVESTORS’ ABILITY TO TRADE ASSET?

Under new rules established under the Energy Performance of Buildings Directive, owners of non-residential buildings are now compelled to improve their assets to meet Minimum Energy Performance Standards (MEPS). The EPBD was revised and approved the update in March 2024 and includes requirements to renovate the 16% worst-performing buildings by 2030 and the 26% worst-performing buildings by 2033.

The ways in which the buildings will be classified under the MEPS will be up to each individual country to determine. In the UK this has been introduced under the Minimum Energy Efficiency Standards (MEES). regulations.

From 1 April 2023, all leased non-domestic properties in England and Wales must be rated as E or above on its EPC for the lease to be lawful, with the ultimate goal of the minimum standard being B or above by 1 April 2030. Although this has yet to be enshrined in legislation, many investors are now working toward this in preparation for these future minimum standards.

Beyond this point, assets will need to be upgraded before they can be let or sold.

The revised EPBD also makes zero-emission buildings the new standard for new buildings. All new residential and non-residential buildings must have zero on-site emissions from fossil fuels, as of 1 January 2028 for publiclyowned buildings and as of 1 January 2030 for all other new buildings, with a possibility for specific exemptions.

It also requires that from 2030, whole life carbon (WLC) reporting will be required for all new buildings. In addition, by the start of 2027, Member States will need to publish a roadmap detailing the introduction of WLC limit values for all new buildings and set targets from 2030.

In addition, the EU has introduced its EU Taxonomy system, a cornerstone of the EU’s sustainable finance framework and an important market transparency tool. It helps direct investments to the economic activities most needed for the transition, in line with the European Green Deal objectives. The taxonomy is a classification system that defines criteria for economic activities that are aligned with a net zero trajectory by 2050 and the broader environmental goals other than climate. For investors, this provides the clarification as to what investment can be considered ‘sustainable’.

To be considered sustainable, investment must be directed towards economic activities that assist in meeting six environmental challenges (as well as minimum social guarantees) as follows:

CLIMATE CHANGE MITIGATION

SUSTAINABLE WATER MANAGEMENT

ADAPTATION TO CLIMATE CHANGE POLLUTION PREVENTION

HEALTHY ECOSYSTEMS THE CIRCULAR ECONOMY

Under the appropriate delegated acts, criteria have been established for the acquisition and ownership of existing buildings (built before December 2020 –those built after this must comply with standards for newly built buildings) to be considered compliant with the EU taxonomy and therefore able to be considered sustainable.

The first principles of these criteria are that the investment must make a substantial contribution to one of the environmental challenges whilst doing no significant harm to the others. Of the climate change mitigation environmental objective, a key threshold which must be met is in relation to an assets energy performance:

For a standing asset built before 31 December 2020 to be considered as making a substantial contribution to climate change mitigation, one of the thresholds is that, the asset must hold at least EPC class A, or sit within the top 15% of national building stock (as measured in primary energy demand)

For a standing asset to be considered as making a substantial contribution to climate change adaptation and (when built before 31 December 2020) to do no significant harm, the asset must have at least an EPC C or feature in the top 30% of the relevant market.

SO HOW DOES AN INVESTOR KNOW IF THEIR INVESTMENT IS EU TAXONOMY COMPLIANT?

In order to be able to determine what constitutes the top 15% and top 30% of buildings by energy performance, organisations such as Deepki and the European Sustainable Real Estate Initiative are drawing real-life data together to provide benchmarks for different asset classes and their energy use and emissions. From this data, investors and asset managers will be able to determine whether investments are considered compliant with EU taxonomy.

CONSUMPTION FOR

Not all investors or owners of assets will be required to be compliant with the EU Taxonomy for investment: those that fall under the scope of the Sustainable Finance Disclosure Regulation (SFDR) will be required to report to what extent their activities align with the criteria set in the Taxonomy. Investors and owners that do not fall under the scope of SFDR can decide to disclose this information on a voluntary basis.

HOWEVER, MORE COMPANIES ARE EXPECTED TO USE THE EU TAXONOMY FOR REPORTING IN ORDER TO BE ABLE TO BENCHMARKED AGAINST AN EXTERNALLY RECOGNISED SET OF STANDARDS.

The EU Taxonomy is designed to be a transparency tool that will allow for the comparison of companies and investment portfolios and will provide a guide for market players to make decisions.

More and more companies, including real estate businesses, are now using the EU Taxonomy to guide and showcase their taxonomy-aligned capital investments: the number of real estate businesses reporting taxonomy-aligned capital investments grew from 35 in 2022 to 41 in 2023 and their total aligned investments increased from EUR 4 billion to EUR 5 billion in 2023.

BEYOND CERTIFICATION

However, real estate investment is now looking far beyond certification and considering what the transformation of assets could be, especially as factors such as fund performance and access to financing will be informed by these future strategies.

A key element of asset trajectory over time is understanding when assets are no longer attractive to the market and are likely to be ‘stranded’, that is, untradable.

Once the baseline emissions and energy usage of an asset are established, using the CRREM pathways tools, asset owners and managers can determine when an asset is likely to be stranded and factor in pricing or valuation adjustments to reflect the future challenges this asset will face.

For an investor pricing for acquisition, it will also allow for capital expenditure budgeting to improve the asset to move its stranding point to further in the future. The image below shows an example of how the CRREM pathways can be utilised to understand how capital expenditure on refits can make a difference to the stranding point of assets.

CARBON EMISSION PATHWAYS OF 1.5°C SCENARIO FOR AMBIENT ("WARM") WAREHOUSES, BY COUNTRY (CO2 INTENSITY PATHWAYS)

However, investors, owners and asset managers also need to consider the different ways in which CRREM stranding analysis can be appraised. CO2 reduction is a key metric and all assets are expected to be on a pathway to zero or near zero carbon emissions.

In the previous chapter of this report, we created an analysis around a hypothetical portfolio of assets with the modelled goal to invest in asset improvements that would result in the reduction of carbon emissions to 0 kg of CO2 per sqm per year. This would mean that all assets would remain on the CRREM pathway to 2050 (based on the 1.5 degree scenario) and no assets would be stranded.

However, if we look at the assets’ energy efficiency, refits may need to go further to deliver improvements in energy use intensity (EUI). EUI is a key measure of a building’s energy performance and is. In our hypothetical portfolio, the EUI of over half of the buildings improves sufficiently to move the asset’s stranding year from already stranded to 2031 or beyond. However, 36% of assets will be stranded between 2027 and 2030 despite reducing their carbon emissions to zero, and 11% of assets remain stranded based on their EUIs, implying that assets in different geographies have different challenges to overcome.

This means that when considering the future value of assets, we need to consider different approaches and how the market will value different metrics.

CERTIFICATIONS SUCH AS A BREEAM, LEED AND LOCAL EPCS ARE A USEFUL GUIDE TO UNDERSTANDING THE CHARACTERISTICS OF THE ASSETS NOW BUT USING TOOLS LIKE CRREM AND EU TAXONOMY REPORTING WILL HELP INVESTORS TO ENSURE THAT THEIR ASSETS AND PORTFOLIOS ARE CONTINUING TO REMAIN RELEVANT, COMPLIANT AND VALUABLE IN THE FUTURE.

PROPORTION OF ASSETS BY EUI CRREM PATHWAY STRANDING YEAR FOLLOWING ASSET IMPROVEMENT

Source Cushman & Wakefield (using CFP

PROPORTION OF HYPOTHETICAL PORTFOLIO

HOW DO SUSTAINABILITY FACTORS IMPACT FINANCING?

An important consideration for all real estate stakeholders is how to finance acquisitions and improvements to assets to ensure they are meeting sustainability targets. This can be for specific assets – through capital expenditure to improve certification or energy performance for example - or funds in total – for example improving GRESB ratings. So how are financing dynamics changing for borrowers and lenders in the sustainability context?

GREEN BONDS

GREEN BOND ISSUANCE IS ONE AVENUE THAT REAL ESTATE BUSINESSES HAVE USED TO SECURE FINANCING FOR REAL ESTATE IMPROVEMENTS.

Green bonds offer businesses the opportunity to raise funds typically for specific capital expenditure on improving existing assets. A key measure of suitability is both the energy and sustainability performance at an asset level and also the improvement of real estate funds’ performance (such as valuations) and accreditations (such as GRESB).

Green bonds have proven attractive to real estate companies: EPRA reports that, since 2013, EPRA members raised a total of EUR 48.5 billion in green bonds, of which logistics and industrial real estate companies accounted for more than 18% of funds raised. Logistics and industrial real estate companies issuing green bonds include Prologis, Segro, Tritax Eurobox, P3, WDP and CTP.

Pricing of green bonds is also proving to be attractive meaning financing costs are lower for issuers: EPRA analysis shows that green bonds display an average

in the range of -4.5 bps to -8.3

compared to standard comparable corporate bonds.

DEBT FINANCING

IN PRACTICE, THE MAJORITY OF FINANCING COMES FROM SENIOR SECURED LENDING, BEING MUCH MORE ACCESSIBLE TO A WIDER RANGE OF INVESTORS (WHEREAS BONDS ARE MORE LIKELY TO BE THE PRESERVE OF LISTED OR LARGER PROPERTY FUNDS). WITHIN THIS SPHERE, IT IS IMPORTANT TO ASSESS THE SHIFT IN LENDER SENTIMENT AROUND SUSTAINABILITY FACTORS.

Prior to 2020, sustainability factors were indeed a consideration in the lending process, but rather more a ‘nice to have’ than anything further. Importantly, they were often seen as anathema to the profit motive and maximising economic returns. Fast forward to today, and particularly since the pandemic, sustainability is now at the forefront of lending policy across the spectrum. It is also demonstrably for the first time also directly correlated with maximising investment outcomes and derisking scheme with tenants, developers, future purchasers and debt providers all being aligned on this.

For senior secured lenders, sustainability features at the asset level (or the requirement to invest in improvements to get there) are now increasingly a prerequisite to providing finance – it is a measure of the capability of a property to be or stay ‘core’, thus demonstrating ‘refinanceablity’ or ‘saleability’ at the end of the loan term.

Increasingly, there is a large and active market in specific sustainable financing products for lenders at the asset levels – these are sourced from across the spectrum including clearing banks, international banks and insurance/institutional lenders where several have live and large credit lending programmes that offer borrowers:

More favourable rates for acquiring or developing/modernising assets into more highly-rated assets (rated in terms of certifications such as local EPCs or BREAAM and LEED)

Extensions to borrowing limits (based on LTV thresholds) to include funds for capital expenditure improving assets’ sustainability performance (including energy efficiency and lowering carbon intensity)

THE POOL OF LENDERS WILLING TO LEND WITHOUT THESE REQUIREMENTS IN PLACE IS RAPIDLY BECOMING MORE CHALLENGING, PARTICULARLY GIVEN THE INCREASINGLY ACCEPTED LINKAGE BETWEEN PROJECT VIABILITY AND SUSTAINABILITY. LENDERS HAVE FOR SOME TIME NOW BEEN TIGHTENING THEIR LENDING CRITERIA AND APPETITE ON ASSETS THAT DO NOT MEET THEIR SUSTAINABILITY CRITERIA.

For example, lenders are setting their own targets for their loan books such as the proportion that needs to be above certain certification levels or on CRREM pathways (including target years that assets cannot be stranded beyond). If assets or plans for assets for capex borrowing do not meet these criteria, lenders are now not prepared to offer financing as they will deteriorate their loan book mix and potentially fail to meet their own targets.

INDIRECT INVESTMENT

INDIRECT INVESTORS – BOTH IN BONDS AND EQUITY INVESTMENT – ALSO VALUE THE SUSTAINABILITY ASPIRATIONS OF COMPANIES AND THE INSTRUMENTS IN WHICH THEY ARE INVESTING.

Research from Morgan Stanley shows that 77% of global investors – and 85% of European investors –are interested in sustainable investing and over half anticipate increasing their sustainable investments in the next year.

This is governed not only by investors’ own policies for sustainable investment – some investors now have in place limitations on or criteria for the types of businesses or enterprises in which they can invest –but also by the expected performance of these assets. Morgan Stanley’s research showed that more than half of investors say that the financial performance of sustainable investments is a key driver of their choice to invest.

Research from Amundi Asset Management shows that institutional investors consistently take the view that responsible investing is favourable to performance in the long term, and that responsible investing is also seen as a key element in investors’ risk management.

Ensuring that their sustainability credentials – at both an individual asset and at a fund level – are in good health will not only ensure that real estate companies are meeting their own goals but that they will be able access capital in the financial markets, helping to ensure their ongoing business operations and to mitigate risks.

Fund-level certifications for sustainability are a key way in which indirect investors can better understanding where to direct their capital. Fund-level certifications include:

GRESB

GRESB (Global Real Estate Sustainability Benchmark) provides ESG performance data and benchmarks of real estate investment funds so investors and managers can make well-informed evaluations and decisions relating to the ESG performance of a given fund. Funds are scored according to aspects of the fund’s real estate management and performance. In 2023, the average GRESB Scores for the Real Estate Standing Investments Benchmark and for the Development Benchmark increased by one point to 75 and by two points to 83, respectively, compared to 2022.

EPRA BPR AWARDS

EPRA (European Public Real Estate Association) established its sustainable Best Practice Reporting (sBPR) to raise the standards and consistency of sustainability reporting for listed real estate companies across Europe. Each year, EPRA awards real estate funds status according to their efforts made by businesses to integrate sustainability into their core operations. Awards range from Gold, Silver and Bronze according to the adherence to its guidelines and the standard and consistency of sustainability reporting by funds.

Additionally, funds are increasingly categorising themselves under the EU’s Sustainable Finance Disclosure Regulation (SFDR). The purpose of the SFDR is to increase transparency and responsibility in the financial industry, support investors’ ability to identify the sustainability objectives of a fund and assist them to identify where to put capital. A growing number of real estate funds are categorising themselves under Articles 6, 8 and 9 of the SFDR which helps funds to demonstrate the sustainability of their investments.

HOW WILL MORE SUSTAINABLE ASSETS PERFORM?

CURRENTLY DATA SHOWING OUTPERFORMANCE OF ‘GREENER’ ASSETS IS DIFFICULT TO ESTABLISH, NOT LEAST BECAUSE THE TIME OVER WHICH ASSETS HAVE BEEN VALUED BY INVESTORS IS STILL RELATIVELY SHORT.

HOWEVER, THE BROAD PREMISE OF WHY ‘GREENER’ ASSETS WILL OUTPERFORM LESS WELL CREDENTIALED ASSETS ARE BASED ON THE FOLLOWING EXPECTATIONS THAT THESE BUILDINGS WILL:

BE MORE LIKELY TO SECURE TENANTS NOW AND IN THE FUTURE: as occupiers become more and more discerning about sustainability credentials of their occupied portfolios, older buildings will no longer be both operationally or sustainability appropriate. This will in turn minimise void periods.

BE MORE LIKELY TO COMMAND HIGHER RENTAL LEVELS: this is on the basis that demand for less well-credentialed assets will weaken and therefore tenant activity will be more directed at higher rated assets. Rental levels will also need to increase for higher rated assets to reflect the additional costs to build or improve buildings to higher sustainability standards. Currently we are seeing ERVs for wellrated logistics buildings at levels typically 10-30% higher than poorer quality assets (although there is variation by geography and market conditions). Also, higher green-rated buildings tend to be newer buildings which offer tenants operational efficiencies and therefore cost savings to operate; this, along with the ambition to meet sustainability goals, is likely to drive occupiers to favour well-rated logistics assets in the future.

In turn, there is the potential that higher rated assets will command stronger rental growth relative to poorer assets (as the competitive tension for better assets increases and for poorer assets decreases) but has yet to be established. There is the potential that higher rated assets will command stronger rental growth relative to poorer assets (as the competitive tension for better assets increases and for poorer assets decreases) but has yet to be established.

BE MORE LIKELY TO RETAIN

VALUE: as these buildings will be more attractive to tenants and therefore more likely to be tenanted and to be let at higher rental levels, their values are more likely to be maintained. Similarly, the attractiveness of these assets to other investors– and therefore the expected investment pricing that could be achieved when selling these assets – is likely to be higher than less well-credentialed assets. Our analysis of acquisition capital values shows this premium is already being priced in at acquisition.

Head of EMEA Capital Markets james.chapman@eur.cushwake.com

PIERRE BUCHET

Head of International Cross Border EMEA Valuation & Advisory pierre.buchet@cushwake.com

Partner, EMEA Capital MarketsLogistics & Industrial will.scott@cushwake.com

Partner, EMEA Equity, Debt & Structured Finance david.gingell@cushwake.com

EVOLUTION INDUSTRIAL 06 SUMMARY

SUMMARY

SUMMARY

OCCUPATION: THE CARBON COST OF LOCATION

• The much larger impact of transportation compared with real estate means that optimising location of logistics buildings can make a huge difference to the overall environmental impact of logistics operations. Careful modelling of supply chains and their emissions – transport as well as buildings – will help to guide decision-making for occupiers.

• C&W-modelled scenarios show that optimising logistics building location can significantly reduce overall mileage of transportation –particularly road transport. Even in scenarios where logistics buildings are less energy efficient, their optimal location can still mean occupiers are in a better position than if they were to relocate and increase their transportation mileage and emissions.

• Emerging improvements in transportation technologies and business practices will influence locational choice in the future. These, as well as improvements to logistics buildings, will all contribute to the wider environmental impact of logistics and supply chains.

DEVELOPMENT: BUILDING BETTER

• Developers are leading the way in addressing sustainability in logistics buildings Considering how to reduce environmental impact by viewing assets’ whole life carbon impact, developers are considering how to minimise embodied carbon (notably through exploring new building materials, design features and construction practices) and operational carbon (including features that improve energy efficiency of buildings) as well as end-of-life strategies.

• Enhancing social impact is now a key part of logistics developments. Developers are integrating more, higher-quality spaces for people in logistics buildings and parks which helps improve staff wellbeing, an increasingly significant factor for occupiers for worker recruitment, retention and performance. Developers are also focusing on ways in which their buildings and schemes can better integrate with communities and environments within which they are located.

• Improving adaptability of logistics buildings is emerging as a key factor in new development. Future adaptability includes reusing building elements (such as frames and slabs), recycling components (such as panels and racking) minimising demolition through strategic improvements only and anticipating future requirements to include flexibility during initial construction.

SUMMARY

SUMMARY

ASSET MANAGEMENT: MANAGING SUSTAINABLY

• Understanding the opportunities and challenges related to sustainability is crucial to asset management strategies of existing assets. Mapping asset management strategies start with understanding what assets are now (especially in terms of their energy use intensity, carbon emissions and certifications), what they could be and how to achieve this and what are risks of not doing enough or anything at all.

• C&W’s analysis of a portfolio of over 90 hypothetical buildings shows how specific asset improvements make a difference to emissions of logistics buildings. Retrofitting solar photovoltaic panels is one of the most significant ways that carbon emissions can be reduced. Other strategies such as replacing lighting and heating systems with less impactful technologies as well as installing energy management and control systems also make a difference.

• As well as improving energy efficiency and operating carbon, asset improvement strategies also need to consider their impact on embodied carbon, including calculating not only the financial payback period but the ecological breakeven point.

• Landlords and occupiers have the opportunity to work together on asset management strategies to improve buildings’ sustainability. Understanding what occupiers want from their buildings and their real estate partners (including landlords and asset managers) will ensure that building improvements add value to all stakeholders.

INVESTMENT: INVESTING IN SUSTAINABILITY

• Sustainability certification has become a far greater consideration for investors when consider the value of real estate assets. Investors are focusing on sustainability certification as a hallmark of asset quality, particularly in terms of future asset attractiveness to tenants, void periods, rental levels and value retention.

• C&W’s analysis of over 1,400 transactions shows that investors are putting an average pricing premium of 19% on well-rated assets. This increases to 24% when excluding super-prime locations; this implies that investors are placing even higher value on green credentials in locations where the quality of the asset will have a greater impact on its ability to attract and retain tenants, income and value.

• ‘Greener’ assets are expected to outperform less well-credentialed assets on the basis that these buildings will be more likely to secure tenants now and in the future (minimising void periods), be more likely to command higher rents (as a result of securing tenants at higher rental levels) and be more likely to retain value (as they prove more attractive to investors). C&W analysis shows that currently ERVs for well-rated logistics buildings are at levels typically 10-30% higher than poorer quality assets.

• Investors are also looking beyond certification to understand how assets need to be improved to optimise performance and avoid being stranded, particularly as trading rules, market expectations (notably around EU Taxonomy-compliant investment) and financing options become more focused on sustainability measures.

NAVIGATING CHANGE IN EUROPEAN LOGISTICS REAL ESTATE ABOUT CUSHMAN & WAKEFIELD

Cushman & Wakefield (NYSE: CWK) is a leading global commercial real estate services firm for property owners and occupiers with approximately 52,000 employees in nearly 400 offices and 60 countries. In 2023, the firm reported revenue of $9.5 billion across its core services of property, facilities and project management, leasing, capital markets, and valuation and other services. It also receives numerous industry and business accolades for its award-winning culture and commitment to Diversity, Equity and Inclusion (DEI), sustainability and more. For additional information, visit www.cushmanwakefield.com

of EMEA Logistics & Industrial and Retail Research sally.bruer@cushwake.com

Head of EMEA Logistics & Industrial tim.crighton@cushwake.com

Copyright © 2024 Cushman & Wakefield.

All rights reserved. The information contained within this report is gathered from multiple sources considered to be reliable. The information may contain errors or omissions and is presented without any warranty or representations to its accuracy.

Head of ESG for EMEA james.woodhead@cushwake.com

Associate, EMEA Logistics & Industrial and Retail Research michal.toporowski@cushwake.com

INDUSTRIAL EVOLUTION